Delta, Northwest losses widen on noncash charges

ChristopherHinton

NEW YORK (MarketWatch) -- Delta Air Lines and Northwest reported dramatically wider first-quarter losses on Wednesday due to billons of dollars in noncash write downs to reflect a decline in their market capitalization and the sky-high cost of fuel.

For the past quarter, Atlanta-based Delta reported a loss of $6.39 billion, or $16.15 a share, compared to a loss of $130 million in the same period last year. Total operating revenue rose to $4.77 billion from $4.24 billion.

Excluding about $6.1 billion in one-time charges, Delta said it lost $274 million, or 69 cents a share, missing analysts' mean estimate of a loss of 50 cents a share, according to data provided by FactSet Research.

Delta
DAL, +0.84%
said it wrote down about $6 billion, or 50% of its goodwill value, a broad category that typically represents non-tangible items such as brand value and clientele lists, but can also include the perceived value of a business model based on market conditions.

"Change in economic conditions, combined with the recent merger announcement, created a triggering event for accounting purposes, requiring us to update the valuation of our stand-alone business plan using current assumptions regarding fuel price and the economic environment," said Chief Financial Officer Ed Bastian on a post-earnings call.

On April 14, Delta and Northwest Airlines
NWA, +1.72%
announced their intention to merge operations to better compete with international rivals and more effectively combat the impact of record-high fuel prices. See related story.

In the last year, oil prices have more than doubled while jet fuel costs have soared upwards and beyond 50% for many airline carriers. Further, a looming economic recession could mean a decline in the number of people flying.

At Northwest, the Minneapolis, Minn.-based carrier said its loss first-quarter loss widened to $4.14 billion, or $15.78 a share, from $292 million, or $3.34 a share, a year ago. Revenue increased 8.8% to $3.13 billion.

Excluding a $3.9 billion, noncash goodwill impairment charge the carrier said it lost 26 cents a share, in line with analysts' mean expectation.

Year-over-year, Northwest said its first-quarter fuel expense increased by $445 million, or 57.3%, which helped to significantly drive down the value of the company's goodwill as investors dumped the stock.

"While the adjustment does reflect a decline in our stock price, it doesn't represent management's intrinsic view of the company or the operating and financial benefits of our announced merger," Northwest said.

Delta shares declined 3.5% to close at $6.56, while Northwest shares shed about 5% to $7.10.

Cutting capacity

To help mitigate the cost of higher fuel costs, Northwest said it will reduce its domestic capacity after the peak summer travel period by 5%, mothballing 15 to 20 older aircraft from its fleet. The move is expected to trim costs by removing older, more expensive aircraft from the fleet and eliminating lower yielding routes.

The carrier is also accelerating the retirement of three freighter aircraft and suspended freighter service to Bangkok and Singapore, along with other Asia destinations in the near future.

Delta, meanwhile, expects to remove between 15 to 20 mainline aircraft and between 60-70 regional jets, which should cut domestic capacity in the second half of 2008 by 9% to 11%, and system capacity to be between flat and down 2%.

Delta said it is also accelerating revenue and productivity initiatives, as well as cutting capital spending, to receive cost benefits of about $350 million on an annual basis, in addition to $400 million in productivity initiatives announced previously.

Both carriers looked at their merger deal as a way of combating higher costs. The deal is expected to close by the end of the year, but is also expected to face significant antitrust scrutiny.

"The merger with Northwest will create an airline with the size, scale and global presence to weather economic downturns and compete long-term in the global marketplace," Richard Anderson, Delta's chief executive, said on the conference call.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.